Markets
DMart needs to put some zing into sales
Summary
In the March quarter (Q4FY23), while revenue grew 20% year-on-year to ₹10,337 crore, Ebitda growth has been slower at just 5.4%.Avenue Supermarts Ltd, which runs the DMart supermarket retail chain, has been bearing the brunt of a weaker sales mix for the past few quarters. The problem: revenue from the high-margin general merchandise and apparel segment has been adversely impacted by lower consumer spending.
In this scenario, DMart’s margin has taken a beating. In the past three quarters, standalone earnings before interest, taxes, depreciation, and amortization (Ebitda) margin has fallen on a year-on-year basis. In the March quarter (Q4FY23), while revenue grew 20% year-on-year to ₹10,337 crore, Ebitda growth has been slower at just 5.4%. “It is the slowest (Ebitda) growth seen since listing and was much lower even compared to our somewhat-muted expectations," JM Financial Institutional Securities analysts said.
DMart’s Q4 revenue growth was driven by expansion in retail business area, which was up 16.5%. Of course, the company’s retail area and overall revenue now is far ahead of pre-covid levels (Q4FY19). However, unit economics measures are still lagging. For instance, as the chart alongside shows, revenue per square foot in Q4 was below pre-covid levels by about 9%. “We believe, this is due to under-recovery in general merchandise and apparel; and large size (about 45,000-50,000+ square feet) stores added by DMart during FY19-23 (now 63% of total retail area)," said analysts from ICICI Securities in 14 May report. Moreover, footfalls have not yet recovered as indicated by lower bills per store compared to pre-covid levels.
Note that against expectations of a recovery, the share of general merchandise and apparel segment in revenue fell to 23.04% in FY23 compared to 23.40% in FY22. For perspective, this measure was higher at 27% in FY20. Higher competitive intensity in apparels may have weighed on the overall segment. “Per our channel checks, in apparel segment (about 50% share of retail area in general merchandise and apparel), DMart is facing strong competition from specialist retailers like Zudio, Max, etc." said ICICI Securities’ analysts.
Moreover, the performance of DMart’s newer stores is lagging expectations. DMart has said same store sales growth (SSSG) for half year ending March (H2FY23) for stores that were at least 24 months old was 11% vis-à-vis H2FY22. This performance is better than expected, say some analysts. But, “What this implies is that newer stores are underperforming and dragging system average down quite a bit. This needs working on," JM Financial analysts said.
For FY23, SSSG stood at 24.2% compared to FY22, partly aided by lower base in Q1. Meanwhile, DMart has commenced operations of its pharmacy shop-in-shop in Q4 through the launch of its first outlet. Kotak Institutional Equities analysts believe DMart’s pilot of in-store pharmacy reflects its efforts to counter weak SSSG.
To be sure, revenue growth of FMCG and staples has continued to outperform, supporting DMart’s overall growth. In FY23, the company added 40 stores, taking the total count to 324. While store additions would boost revenue growth ahead, recovery in general merchandise and apparel segment is a key monitorable for the stock.
DMart’s shares fell by 4% on Monday in reaction to Q4 results, which were declared on Saturday. Note that stock reaction was muted even after Q3 and Q2 results were announced. As things stand, the stock is down nearly 24% from its 52-week highs of ₹4,609 apiece in September. But it’s not like valuations are exactly cheap with stock trading at near 58 times FY25 estimated earnings, according to Bloomberg data.
